Adjustable versus fixed loans

A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call 1st Credential Mortgage Inc at (281) 778-0805 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment will not go above a fixed amount in a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — the interest rate won't exceed the cap amount.

ARMs most often feature the lowest, most attractive rates toward the start of the loan. They usually guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.

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